Reuters
Spiking SHIBOR, an interest rate used among banks, has been showing signs of liquidity stress in China.

We previously explained that the spike in SHIBOR, or the Shanghai interbank offered rate, could be attributed to demand for cash ahead of the Dragon boat festival which took place last week, decline in Forex inflows, tax-related liquidity demanded, and a crackdown on illegal bond trading.

UBS's Tao Wang writes that this was also because the central bank decided not to "backstop banks’ every demand for liquidity." From Wang:

"Banks have perhaps misjudged the PBC’s policy direction earlier. With the economic data disappointing and inflation low, many in the market had expected the PBC to keep liquidity flowing or ease monetary condition further. However, with the central government apparently more tolerant for slower growth and concerned about financial risks, the PBC seemed to be keen to keep a “prudent” policy stance.

"…The PBC has made it clear in the past 10 days that overly-rapid credit expansion would not be accommodated and banks may have to scale down their credit growth plans and manage their own liquidity more prudently. Moreover, regulators are reportedly preparing steps to clean up interbank activities – some banks have used interbank transactions with banks and non- bank financial institutions aggressively to fund their lending or offload their loans – which could cause some unwind of such activities and lead to additional liquidity tightness."

"The central-bank-backed newspaper cited several unidentified sources as saying that the PBOC is refusing to step in and bring relief to the market, and specifically those banks that have bypassed regulatory caps on lending and fallen into difficulty as liquidity conditions tighten.

"'These banks are highly reliant on interbank borrowing to adjust their positions. They can manage their operations when capital inflows are high and regulators haven't tightened policy against non-bank financing... but when liquidity tightens because of sharply declining inflows, their liquidity becomes very tight,' it said."

Remember, it's more than just spiking SHIBOR rates that has people worried.